Mumbai: A recent reduction in cooking gas prices is likely to exert a softening effect on inflation that’s also being aided by declining non-food prices, but monetary policy must remain in “risk-minimisation” mode to firmly bring consumer prices back to the legally mandated target, central bank economists said.
“Fuel prices remain in deflation, and this may get pronounced in March due to the reduction in price of liquified petroleum gas (LPG). Overall, headline inflation’s momentum turned positive in February 2024, offsetting a favourable base effect,” Reserve Bank of India (RBI) economists wrote in the March Bulletin.
“Accordingly, monetary policy has to remain in a risk minimisation mode, guiding inflation towards the target while sustaining the momentum of growth,” the central bank economists wrote in the ‘State of the Economy’ article, which counts RBI Deputy Governor Michael Patra among its authors.
Views expressed in the article are those of the authors and not necessarily of the central bank itself.
India’s Consumer Price Index inflation was at 5.09% in February, largely unchanged from 5.10% a month ago. The RBI’s target for the price gauge is 4%, with a latitude of 2 percentage points in either direction.
On March 9, the government slashed LPG prices by Rs 100 per cylinder, followed by a cut of Rs 2 per litre each on retail selling prices of petrol and diesel on March 14.
While core inflation has consistently declined over the past few months, dropping to a four-year low of 3.4% in February, erratic food prices have imparted volatility to headline retail inflation, thereby warranting vigilance on the part of the RBI. Core inflation strips out food and fuel.
After raising the repo rate by a cumulative 250 basis points from May 2022 to February 2023, the RBI has kept interest rates on hold.
High-frequency food price data up to March 15 show a decline in cereal prices, primarily for wheat, although pulses prices displayed a broad-based increase, the authors wrote. Meanwhile, edible oil prices stayed on a declining path, while amongst key vegetables, tomato prices have softened so far this month although onion and potato prices have risen.
Growth, Capacity Utilization
Following the sharper-than-expected expansion in India’s GDP growth to 8.4% in Oct-Dec, the ‘nowcast’ of real GDP growth for Jan-March suggests that official growth estimates for the current fiscal year will be outstripped and that a growth rate “closer to 8%” may be clocked, the authors wrote.
The National Statistics Office estimates India’s GDP growth for FY24 at 7.6%.
“Capacity utilisation in several sectors has reached a point where there has to be new investments. The high visibility of structural demand and healthier corporate and bank balance sheets will likely be galvanising forces,” the authors wrote.
